Michael S. Derby
HARTFORD, Connecticut (Reuters) – New York Federal Reserve Bank President John Williams said on Wednesday that future monetary policy actions will be driven by economic data as the central bank faces a high level of uncertainty fueled in large part by potential changes in government policy.
The official also noted rising bond yields and said he did not see that indicating a fundamental change in investors’ view of inflation prospects.
“Monetary policy is well-positioned to keep risks to our objectives in balance” and “the path of monetary policy will be data-driven,” Williams said in a speech at the CBIA Economic Summit and Outlook 2025 in Hartford, Connecticut.
Williams, who also serves as vice chairman of the Federal Open Market Committee for setting interest rates, pointed to the government as a key source of what limits him in providing guidance on the outlook for monetary policy.
“The economic outlook remains highly uncertain, particularly around potential fiscal, trade, immigration and regulatory policies,” Williams said, “so our decisions on future monetary policy actions will continue to be based on the totality of the data, the evolution of the economic outlook and the risks to achieving our dual mandate goals.”
At the Fed’s latest policy meeting last month, central bankers cut the target range for the federal funds rate by a quarter of a percentage point to between 4.25% and 4.5%. As part of updated forecasts, they also cut estimates of rate cuts for the current year and raised inflation forecasts after recent data showed sticky price pressures.
Donald Trump’s return to the presidency has cast a cloud over the outlook, as the president-elect campaigned on trade and immigration policies that economists widely believe will increase inflation and complicate the Fed’s work to bring inflation back down to 2%.
YIELD DRIVE
As Trump’s inauguration approaches, yields on government bonds, especially those with longer maturities, have risen, signaling a jump in the real cost of borrowing. Speaking to reporters after his remarks, Williams said he did not see the move as tied to a comprehensive reassessment of the inflation landscape.
“We haven’t seen a big shift in inflation compensation” in the market, but there appears to be a shift in how investors deal with interest rate risk as measured by the concept of the term premium, Williams said. These higher bond yields seem to be “a reflection of the strength of incoming data, but also market uncertainty regarding issues of fiscal policy, other policies, global trends.”
In his official address, Williams said the economy is in good shape and has returned to balance after the disruptions of the pandemic years. He said the process of disinflation was likely to continue, but added that it could take some time, noting that he saw a return to the 2% target “in the coming years”.
Williams also said he expects the nation’s gross domestic product growth to moderate to 2 percent as the unemployment rate remains around 4 to 4.25 percent.
He also said the Fed’s balance sheet reduction was proceeding smoothly and told reporters that reserve levels in the financial system still looked quite strong, suggesting there was no imminent end to the ongoing contractionary process known as quantitative easing.
